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Annie’s Case Study Solution

Annie’s Case Study

OFFER 

Founded in 1989, Annie’s offers a variety of simple and reasonably priced food products including meals (packaged/frozen entrees), snacks (crackers, cookies, bars, gummies), and condiments/dressings. Products are made with high-quality, organic ingredients and use natural processes in order to provide a healthier and environmentally respectful alternative to similar product offerings from other companies.

Annie’s believes its culture to be a strong competitive advantage and an aspect that their customers value.

  • The company engages in many practices, partnerships, and programs supporting environmental sustainability and healthy foods.
KEY PARTNERS

Acquired the Joplin Plant, which had been their primary manufacturer for crackers and cookies.

  • The plant accounted for 40% of snack sales in 2014*.

Annie’s uses contract manufacturers for all other product manufacturing.

  • The 4 largest manufacturers accounted for 85% of net sales in 2014*.

Annie’s purchased 42 million pounds of organic ingredients in 2014*.

  • Annie’s has a long-term partnership with Organic Valley (a large farm-family cooperative) to provide organic ingredients.
  • Results in preventing synthetic nitrogen fertilizer, pesticides, and herbicides from polluting land, air, and water (prevented 23 million pounds between 2008-2012).
KEY RESOURCES

Annie’s places substantial value on their intellectual property believing it contributes to their success through brand distinction, favorable perception among consumers, and adding to their competitive advantage.

  • Include product patents and registered trademarks such as “Annie’s Naturals”, “Bernie Rabbit of approval”, and more.

Proclaimed pathway to sustainability emphasizes: 1) supply chain, 2) office and employees, 3) inspiring change, 4) tracking their performance throughout each aspect.

KEY ACTIVITIES

Annie’s incorporates organic/natural and sustainable efforts and takes time to find suppliers with similar values so that every ingredient is up to standard, and to uphold their commitment to reducing environmental impacts.

  • Their code of conduct ensures that suppliers’ practices meet expectations in ethics, health, & environment protection.
  • They measure suppliers’ sustainability through numerical data and surveying.
Clients

Annie’s targets the mass market, but their products primarily appeal to consumers who are health-conscious and well educated on environmental repercussions. Their products especially appeal to such parents who are looking for healthy food alternatives for their children.

  • Ingredients contain no artificial flavors, synthetic colors or preservatives, GMOs, growth hormones, and persistent pesticides.

More than 90% of

  • product packaging is recyclable.

Such consumers require a large variety of products and easy accessibility

  • Annie’s currently offers over 145 products available in over 35,000 retail locations (U.S. & Canada)
CHANNELS

Annie’s reaches its consumers through mainstream grocery, mass merchandising, and natural retailers.

Annie’s raises awareness of their products through “traditional grassroots” marketing efforts.

  • Sampling, public relations, and participating in community events.
  • Attempting to reach a broader audience through social media communication.
RELATIONSHIPS

Consumers expect easy access to information on Annie’s business practices, product and ingredient details, and environmental sustainably efforts in order to confirm the value of purchasing their products.

  • Annie’s practices honesty and direct communication, and has all of their information organized and available on their website.

Consumers expect community outreach to support a business’ social/environmental proclamations.

  • Annie’s programs include Grants for Gardens, Cases for Causes, and Sustainable Agriculture Scholarships.
KEY ACTIVITIES

Annie’s incorporates organic/natural and sustainable efforts and takes time to find suppliers with similar values so that every ingredient is up to standard, and to uphold their commitment to reducing environmental impacts.

  • Their code of conduct ensures that suppliers’ practices meet expectations in ethics, health, & environment protection.
  • They measure suppliers’ sustainability through numerical data and surveying.
Cost Center

Cost of sales expense accounted for 62.9% of net sales in 2014*.

  • Annie’s primarily sources their packaging and organic/natural raw materials through contract suppliers, of which contracted ingredients accounted for 30% of total cost of sales expense.

Selling, general & administrative costs accounted for 24.3% of net sales.

  • Annie’s emphasizes innovation as a competitive strength and spent $2.3 million on R&D (~4.6% of SG&A expense).
REVENUE STREAMS

Address the increasing demand for natural/organic products, in which consumers are willing to pay higher margins on than other products.

  • Organic products represent 85% of total sales

Annie’s holds the #1 organic market position in 4 product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers

  • Meals & snacks accounted for 87% of net sales in 2014*

Problem Statement: How can Annie’s stabilize profit margins in a highly competitive and growing market under the pressures of limited resources and volatile pricing of inputs?

Alternative #1: Expand growth in Canada to by pursuing local raw material supply sources, contract manufacturers, and distribution channels.

Pros

Opportunity for Annie’s to increase a currently low revenue stream.

Only 4% of net sales were attributable to Canada in 2014*.

Higher volume of sales increases the company’s financial resources available, which helps protect profitability and market share.

Under the threat of rising competition, increased spending on marketing, advertising, and promotions can help increase Annie’s brand recognition and product placement in mainstream grocery aisles (currently, the average retail grocer only carries 14 of their 33 key products).

Additional inflow allows the company to refrain from increasing prices caused by rising cost of sales expense (gross margin percentage decreased by 1.2% from 2013*)

Decrease the risk associated with Annie’s sales being concentrated on a few major distributors/retailers.

In 2014*, the companies 3 largest customers accounted for a combined 50% of net sales.

Cons

High initial costs associated with expansion such as transportation, new property/equipment expenses, contract negotiations, and additional personnel.

Canada’s organic/natural food industry may be too saturated for Annie’s to effectively enter distribution channels and secure shelf space.

Contract manufacturing capacity availability may prove insufficient for desired production.

Inadequate supply sources for key ingredients.

Lack of brand recognition in Canada, and the associated marketing costs to increase it.

Diversion of attention and resources from current U.S. operations and expansion.

Alternative #2: Shift away from contract manufacturing by executing acquisitions of product manufacturing plants, starting with the dressings/condiments category and progressing to the meals category of Annie’s food products.

Pros

Provides the long-term opportunity for fixed-cost operating leverage to increase sales margins.

Decreases reliability on contract manufactures for production capacity and timely/cost-effective delivery.

Products manufactured by our four largest contract manufacturers accounted for approximately 85% of our net sales in fiscal 2014*.

Prior experience in acquisitions from the recent acquisition of the Joplin Plant.

Annie’s primary cookie & cracker manufacturing plant, accounting for 40% of total snack sales in 2014*.

Controls the majority of the plant’s production capacity.

More control over the manufacturing process, including the sourcing of raw materials, to ensure quality standards are met.

Indirectly contracted ingredients accounted for 50% of total materials costs.

Annie’s experienced a voluntary product recall on pizza products (causing a total expense of $2.9 million) due to a contract manufacturer discovering a deficiency in the sourced flour supply.

Cons

May hinder Annie’s ability to quickly and economically introduce new products.

Quick and economical new product introduction is the company’s proclaimed purpose for contract manufacturing.

Operations of manufacturing plans require different strategies and resources, and may divert attention from the company’s current operations.

Acquisitions require large initial financial resources and have additional on-going costs that may be difficult to anticipate due to lack of experience.

The Joplin Plant acquisition was funded with $7.7 million in cash and included $546 thousand in associated costs.

A higher degree of operating leverage increases the risks associated with forecasting error.

Recommendation: Annie’s starts to take control of the manufacturing process by acquiring manufacturing plants for their other food products such as they accomplished with the Joplin Plant acquisition for snack products. The company would begin with pursuing the acquisition of a manufacturing plant for their dressings/condiments category of foods. This category only accounted for 13% of sales in 2014*, therefore Annie’s can gradually become adjusted to the different strategies and resources associated with manufacturing operations, and any errors or deficiencies in this process will have a less significant impact on total revenue. Upon success and developed experience, the company can progress to acquiring manufacturing plants for the production of the foods in their meals category. This category represented 48% of revenue and, with the appropriate experience in place, will result in the most significant benefits from acquiring manufacturing plants. The reason for acquiring portions of the manufacturing process for each food category instead of 100% of the manufacturing for one category is to diversify the accompanying risk and maintain relationships with important contract manufactures. The acquisition of the Joplin Plant enabled the company to secure the majority share of the plant’s production capacity, which increases Annie’s competitive advantage for a limited resource. This also facilitated the company in directly sourcing the supplies for this plant, which better ensures the quality of ingredients are up to standard. Due to operating leverage gained by the acquisition, Annie’s was enabled to increase the sales margin on $31.63 million of revenue in 2014*. Annie’s can procure similar benefits in their other food categories from gradual acquisition of manufacturing plants, and further reduce dependency on unstable contract manufacturer relationships. Upon developed expertise in manufacturing, they can continue to increase sales margins by refining their operations.

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